Real Estate Investment Trusts are a hot item on Wall Street these days. REITs are publicly traded companies that own and operate property including apartments, offices, retail, self-storage facilities and hotels. Citigroup Global Markets, a division of Citigroup, Inc., reported in September that investments in REITs have reached a record $96 billion. The previous high was $87 billion in February 2007. It seems ironic that so much money is being invested in these mutual funds that buy real estate yet home sales (new and existing) from March to August were at the lowest level on record. Commercial sales haven’t fared much better. The one real estate sector that has done well is multifamily housing. Demand for apartments and rental homes has been on the rise because so many people have lost their homes to foreclosure and first time buyers who normally would have bought a home in the last four years have been unable to meet the tighter lending requirements to obtain a mortgage.
With real estate markets doing so poorly what makes REITs so attractive? Income. Real Estate Investment Trusts are required to distribute at least 90% of their taxable income to share holders. The average dividend yield in REITs so far this year has been 3.7% which is fantastic when compared to money market accounts (1.00%) and 10 year Treasuries (2.18%). According to Morningstar, REITs have had an average annualized dividend growth rate of 5.75 percent the last two decades, or more than double the average rate of inflation and that growth is projected to continue for the next several years. But here’s the catch, there is so much money going into REITs that some market analysts are saying they have become over valued. The funds have been doing so well and investors are so hungry for income that they are willing to pay a premium. Similar to what happened to the price of homes before the bubble burst, some analysts suggest that the over valuation of Real Estate Investment Trusts could result in a painful fall for investors.
How can you take advantage of the strong rental market without over paying for shares in a REIT? Buy a rental yourself. I know this is easier said than done but if you have ever thought of owning a rental, now is a great time to get into the market. A well thought out investment in a rental property can provide income and the opportunity for appreciation. It doesn’t have to be an apartment complex with 20 units. It can be a duplex or a house and it can be located most anywhere in Central Oregon. The demand for rental homes is strong resulting in low vacancy rates and rising rents. As I said last week, all of our homes under management are currently rented and we get phone calls every week from people looking for a place to live.
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